Profit growth may return for Marsh, Aon, Willis

Cost cuts, higher rates should boost revenue growth, analyst says

By

AlistairBarr

SAN FRANCISCO (MarketWatch) - After more than a year struggling in the face of regulatory scrutiny, the world's largest insurance brokers should have begun to generate profit growth again in the first quarter of 2006.

Marsh & McLennan
MMC, +0.11%
the largest broker, Aon Corp.
AOC, -7.14%
the number two, and Willis Group
WSH
the third-biggest broker, should all post earnings gains when they report first-quarter results next week, Jon Balkind and his analyst colleagues at Fox-Pitt, Kelton, wrote in a note to investors on April 17.

"Earnings growth should improve due to a more favorable rate environment and cost-management initiatives at the larger brokers," said the analysts who upgraded their ratings on all three stocks.

Marsh could unveil a 14% increase in operating earnings per share, the analysts forecast. Aon could generate 9% growth, while Willis may lift profit by 4%, they added.

Earnings for the largest insurance brokers have cratered since they gave up controversial payments known as contingent commissions. Insurers pay these commissions to brokers based on factors such as how much business the broker's clients place with the insurance company.

New York Attorney General Eliot Spitzer claimed the payments made brokers more loyal to insurers than their clients.

Since paying millions to settle Spitzer lawsuits last year, all three brokers, but especially Marsh and Aon, have embarked on big cost-cutting projects involving thousands of job losses.

Those programs should begin to bear fruit this year, Balkind and his colleagues said.

Rate increases for some types of insurance in the wake of last year's record hurricane season should also help lift organic revenue growth for the brokers, the analysts added.

Marsh's organic growth in the first quarter could come in at 1%, while Aon's could be 3% and Willis's 9%, they forecast. (Organic growth excludes the effect of recent acquisitions).

"Stabilization in the market overall with meaningful increases in some lines will drive results," Balkind and his colleagues wrote. "While the storms were not the panacea some thought, they certainly helped on the margin."

Still, investors shouldn't get too excited, the analysts warned.

Profit may never return to levels seen when the leading brokers accepted contingent commissions and 2007 earnings estimates remain too high, they said.

New transparency and competition from new entrants in the market, both sparked by Spitzer's regulatory scrutiny, will continue to pressure fees and commissions and lift the cost of hiring talent in the industry, the analysts explained.

Marsh, which reports on May 3, is expected to make 52 cents a share in the first quarter, according to the average estimate of 15 analysts in a Thomson First Call survey.

Speculation has waxed and waned during the past year that Marsh could break itself up by selling units, such as its Putnam asset-management business.

If Marsh misses first-quarter expectations next week, "thoughts of a restructuring of the business will reach a fevered pitch and pressure on management will increase," Balkind and his colleagues wrote.

Willis, which also reports on May 3, is likely to earn 89 cents a share, according to a Thomson First Call survey of 12 analysts.

Aon is expected to make 63 cents a share, a similar Thomson First Call poll found.

Other companies in the insurance industry are scheduled to report first-quarter results next week, including life insurer Prudential Financial
PRU, -0.86%
and property and casualty insurers St. Paul Travelers
STA, +37.50%
Berkshire Hathaway
BRK.A, -1.50%BRK.B, -1.44%
and Safeco Corp.
SAFC

Below is a table showing what analysts expect these companies to report, according to Thomson First Call. Berkshire isn't included because there aren't enough analysts following the company.

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